In the wake of growing concerns about climate change and societal impacts of corporate activities, nations globally have been introducing regulations to ensure transparency and commitment towards sustainable practices. The UK’s move towards the Sustainability Disclosure Requirement (SDR) is a timely response to this global challenge, setting a benchmark for robust, clear, and enforceable disclosure standards.
The Sustainability Disclosure Requirements (SDR) represent the UK’s ambitious move into the world of sustainable finance and corporate responsibility. At its core, the SDR is a comprehensive regulatory framework that mandates companies and financial institutions to disclose their impacts, both positive and negative, on the environment and society. Let’s break down its essence, intent, and significance:
- A unified framework
Prior to the introduction of the SDR, sustainability reporting in the UK was fragmented, with different sectors and industries often adhering to varied standards. The SDR consolidates these multiple streams of sustainability-related reporting requirements into a singular, robust framework. This integration ensures consistency, comparability, and comprehensibility of the sustainability data disclosed by companies, thereby supporting stakeholders in making informed decisions.
- Holistic approach to sustainability
While earlier regulations and frameworks may have narrowly focused on specific aspects of sustainability, such as climate change, the SDR adopts a broader perspective. It emphasises a company’s overall impact on sustainable development, addressing not just the environmental consequences but also the societal implications of a company’s operations, both within and beyond its immediate sphere of influence.
- Enhancing transparency and accountability
The primary objective of the SDR is to foster a culture of transparency and accountability in the corporate world. By requiring detailed disclosures, the SDR ensures that companies are not only aware of their sustainability impacts but are also held accountable for their actions and commitments. This, in turn, promotes trust amongst stakeholders, be it investors, customers, or the general public.
- Regulating greenwashing
With the rising demand for sustainable products and services, there’s been a parallel rise in ‘greenwashing’ – a deceptive practice where companies exaggerate or falsely claim to be environmentally friendly. The SDR directly addresses this challenge. With its stringent disclosure requirements and the introduction of rules like the anti-greenwashing regulation, the SDR ensures that companies’ sustainability claims are genuine, verifiable, and rooted in concrete actions and data.
- Global alignment with a local touch
Recognising the global nature of sustainability challenges and the need for consistent reporting standards, the SDR has been designed to adhere with international standards, such as the IFRS Sustainability Disclosure Standards. However, it also incorporates specific provisions and nuances that address the unique challenges and priorities of the UK market and its stakeholders.
- Future-focused
The SDR isn’t just about the present. It’s a forward-looking framework that prepares companies for the evolving landscape of sustainable finance and corporate responsibility. It pushes companies to not only report on their current sustainability performance but also to strategise and plan for a sustainable future.
- A catalyst for change
Beyond the realm of disclosures, the SDR serves a larger purpose. By mandating transparency and driving accountability, it acts as a catalyst, urging companies to adopt sustainable practices, innovate in green technologies, and align their business strategies with global sustainability goals.
Timeline
From its inception in 2022, the SDR has been designed to promote authentic sustainability claims, safeguard investors, and ensure transparency in the financial industry. With these milestones, the Financial Conduct Authority (FCA) aims to drive trust in the sustainable financial sector, fostering a future where financial products genuinely align with environmental and social goals.
October 2022: The draft proposal
The FCA unveiled the draft proposal for the SDR, marking the beginning of discussions and engagements around the anticipated regulations.
January 2023: End of consultation period
Stakeholders had until this specific month to submit their feedback, concerns, and suggestions regarding the initial SDR draft, allowing the FCA to consider multiple perspectives before finalising the regulations.
October 2023: Setting the standard
- Policy statement: By this time, the FCA will release a policy statement confirming the official SDR rules, providing clarity and direction for all stakeholders.
- Anti-greenwashing activation: The general anti-greenwashing rule is enforced for all FCA-regulated firms, ensuring sustainability-related claims are transparent, fair, and free from deceptive branding
November 2023: Policy Statement published by FCA
Yhis statement sets out its final rules on UK SDR and investment labels. These rules consider stakeholder feedback and represent the most recent version of the SDR. A fundamental change was the exclusion of portfolio management products and services from the scope of the SDR..
From June 2024: Elevating transparency
- Rule enforcement: The enforcement of regulations concerning product labels, initial disclosures, product naming, and marketing begins. This step ensures that firms adhere to specific standards when presenting their sustainability credentials.
From June 2025: Full implementation
- Detailed disclosure mandate: The obligations regarding product-level and entity-level disclosures come into effect for firms boasting more than £50 billion AUM. This phase follows specific phase-in requirements, ensuring a gradual adaptation to the new disclosure norms.
December 2026
Entity-level disclosure requirements for firms with AUM > £5bn will enter into force.
Reporting Under SDR
The Sustainability Disclosure Requirements (SDR) represent a significant leap in ensuring that companies and financial institutions within the UK’s purview provide a clear, transparent account of their sustainable impact. Given the far-reaching implications of sustainability on economic stability and societal well-being, the SDR requires a wide scope of entities to comply. Let’s delve into the specifics of who falls under the reporting scope of the SDR:
- Investment funds:
Any investment fund operating within the UK is bound by the SDR’s stringent disclosure requirements. This encompasses a broad spectrum of funds, from mutual funds to hedge funds and other investment vehicles. Its disclosures will provide potential investors with a clearer picture of the sustainability performance and commitments of the fund.
- Listed issuers:
Companies that have their shares or bonds listed on a UK regulated market are mandated to adhere to the SDR. This ensures that the capital market remains transparent, and investors, analysts, and other stakeholders can make informed decisions based on comprehensive sustainability data.
- UK-based investment managers:
Investment managers, often the custodians of large sums of capital, play a pivotal role in directing funds towards sustainable ventures. By bringing them under the SDR umbrella, the framework ensures that these managers prioritise and advocate for sustainable investments.
- Pension products providers:
Given the long-term nature of pensions, sustainability is a crucial factor in ensuring the continued viability and profitability of pension products. The SDR seeks to gradually integrate pension products into its regime, ensuring that pension holders can be confident in the sustainability of their investments.
- Distributors of in-scope investment products:
This category includes platforms and financial advisers who play a crucial role in guiding investors. These distributors will be required to make labels and consumer-facing disclosures available to investors, ensuring that the products they promote align with the sustainability objectives laid out in the SDR.
- All FCA-regulated firms:
The SDR’s anti-greenwashing rule applies across the board to all firms regulated by the FCA This blanket rule ensures that no FCA-regulated firm can make misleading sustainability claims, thereby upholding the integrity of the market.
- Specific financial institutions:
The SDR has a detailed list of financial institutions that need to comply, including:
- Pension funds: Given the vast sums and the long-term nature of investments involved, transparency in sustainability practices becomes paramount.
- Undertakings for collective investment in transferable securities (UCITS): Management companies and investment companies without separate management companies fall under this.
- Alternative investment fund managers (AIFM): Both full-scope UK AIFMs and small authorised UK AIFMs are required to report under the SDR.
- Authorised funds & investment trusts: Given their reach and influence, their adherence to the SDR is crucial for market-wide sustainability alignment.
- Expansion to overseas products:
The UK government intends to broaden the horizon of the SDR by including overseas products that are marketed within the UK. This move ensures that any product or service related to sustainability and presented to the UK audience adheres to the high standards set by the SDR.
Non-EU Alternative investment fund managers (AIFM) are not in the scope of the UK SDR In ensuring that a broad spectrum of firms and institutions are transparent about their sustainability practices and impacts, the SDR aims to catalyse a systemic shift towards a more sustainable and responsible economy.
Product-level sustainability disclosures
- Pre-contractual disclosures: All products necessitate consumer-facing pre-contractual disclosures, disclosing their sustainability objectives, performance against these objectives, and the sustainability considerations in asset selection.
- On-demand disclosures: Investors can request additional details.
- Extensive reporting: Certain firms are obligated to provide comprehensive product-level sustainability reports.
- Standardised labels & disclosures: The FCA envisions standardised product classification and disclosures to clarify product sustainability characteristics for consumers and investors.
Prioritising ESG factors, the SDR addresses key aspects like comprehensive reporting standards, explicit product labelling, and firm-level accountability.
With a clear timetable stretching from the draft proposal in 2022 to the full enforcement in 2025, the SDR is poised to reshape how businesses, investors, and consumers approach sustainability. The UK’s alignment with the IFRS Sustainability Disclosure Standards further showcases its commitment to global comparability and excellence in sustainable finance.
As the landscape evolves, understanding and adapting to the SDR will be crucial for firms seeking to remain compliant, competitive, and at the forefront of sustainable financial practices.
